a fiduelary to cause a plan to pay additional fees fer a service
furnished by such fiduclary or te pay a fee fer a service
furnished By a person in which such fiduciary has an intercese
which may affect the exercise of such fiduciary's best judgment
ase fiduelary. This may oceur, for example, when one fidueiary
is retained on behalf cf a plan by a second fiduciary to previde
a service fer an additional fee, Sowever, because the author-
ity, control or responsibility which makes a person a fiduciary
may be exercised "in effece® as well ag in form, mere approval
of the transaction by ea second fiduelary does not mean that

the first fiduciary has net used any of the authority, control
ot responsibility which makes such person ea fiduciary te cause
the plan to pay the first fiduciary an additional fee for

a service.

Upon ceview of your application, the Bepartment believes that
the record under consideration contains insuffieient informacion
upon which to base a proposed exemption at this time. ae

our meeting with representatives of the FIA on August 29,
1984, we asked if you could submit any information indicate
ing the degree to which plans are involved in futures transace
tions. Ie appeared at that time that there is ne industrye
wide dats of this type, but you agreed to make inquiries sf
PIA members in order to collect this information. In your
letter sf October 22, 1984, you indicated that the sample
group of FIA wembers questioned were unable to provide the
requested information. In lieu of such information, you sup=
plied the Department with copies of a number of trade publica-
tion articles noting plan participation in futures trading.
The Department has received ne independent submissions of
information from individual PCMs tc augment this record.
Because of this, the record before the Department does aoe
indicate the degree to which plans participate in futures
erading. Similarly, the secerd containg no information on

the extent to which PCMs are fiduciaries with respect to plan
accounts, of whether such PCMe attain fiduelary status either
by virtue cf investment management authority ever plan essets
within the meaning of section 3(21) (A} (1}) of the Act or by
zeascn 6€ gendering investment advice to e plan for a fee
within the meaning of section 3(21) {A} (ii). Further, alehough
you have provided the Bepertment with detailed information
about the generel mechanies ef futures trading, the Department
has no econecete infermation regarding the way in which disere-
eionaery accounts are administered.

in the absence of such information, the Beparguentzigtunable
eo determine if the requese irelieg. is needémow@eeless rte.
basis. If relatively few pléns place as cots. Lag eeet etionase
accounts managed by PCMs, it may Be more apprope ee *hedecess
specific problems through the use of individual exemptiens.

Purther, in Light of the present state ef the record, the
BSepartment has nc besig on which te make the findings required
undezs section £08(a} fer the issuance of an exemption.


APPENDIX £

t ‘ Ie Otiee of Pension eng Welfare Beneit Programs
U.S. Bepartment of Labo: Maan oe eS

AUS 16 1685

Ms. Mary Lb. Shapiro

Vice President and Counsel
Putures Industry Asssciation, Inc.
Suite 1040

1828 I Street, H.R.

Washington, D.C. 20006

Rez: Futures Industry Association, Ine.
Szemption Application No. B-3006

Dear Hs. Shapire:

This is in reply to the request of the Futures industry Assecia-
tion, ine. (PIA) for consideration under the Employee Retirement
Income Security Act of 1974 (the Act} of a number of classes

ef transactions relating to employee benefit plan investments
in futures contracts. On November 16, 1981, the FIA fileg

with the Department a final application fer a number of advisory
opinions and class exemptions regarding plan investments in
£utures sontracts. On September 21, 1982, the Departments
responded te your advisery opinion requests by issuing Advisory
Opinion 62-452. By letter dated December 20, 1982, the PIA
renewed its requests for elass exemptive relief, Additional
information regarding these requests was provided at a meeting
with representatives of the Department on August 28, 1984.

The PIA made a further submission in support of its application
by letter dated October 22, 1984.

Ae Backeround.

in Opinion €2-493, the Bepartment summarized the information
ang cepresentations submitted in Support ef the PIA appliie
Sation. That summary dealt with the mature of the futures
Barkets and the roles ef the various participants {a futures
teading. Because the information you have submitted since
issuance ef Opinion 82-45, ig consistent with and supplementary
te the eummary in Opinion 82-488, we adopt that summary for
the purseseg of this letter,

The original PIA application requested five class exemptions.
You indicate that, in light of Opinion @2-492, you are withe
Szawing the first two class exemption requests. You represent
that the remaining three requestz all relate ¢s the sechanies
of futures trading once the decision has been made to invest
plan monies in futures contracts. Fer purpeses sf convenience
and consistency, we will refer to these requests ag Prohibited
Transaction Class Zxemption (PTC) Request #3, 4, and 8, follow
ing their original enumeration in the PIA application. These
feqguests are treated individually below,


ii

Should you have any questions concerning this matter, please
contact William J. Flanagan, Office ef the Scliciter, Plan
Benefite Security Bivision, (202) 323-8892.

Sincerely,
. oO
Ellice I. Daniel

Assistant Administrator
fer Regulations and Taterpretations


Finally, we encourage the Department to coordinate with the CFTC any changes in the
regulation that could potentially disrupt futures markets and limit plan access to that market. The
CFTC has the obligation to ensure that the futures markets function efficiently and fairly; we
believe their expertise may be helpful to the Department in understanding the concerns we have
raised,

We appreciate the opportunity to comment and look forward to working with the
Department to create exceptions that are workable in all the investment markets, to create a safe
harbor for futures commission merchants, and to propose and grant a prohibited transaction class
exemption for futures commission merchants who may inadvertently become fiduciaries on
account of any change in the regulation.®

Respectfully submitted,

if m . .
Bartana Hob fan iprn GA

Barbara Wierzynski
General Counsel
On behalf of the FIA Law and Compliance Executive Committee

§ See the Department's relief for purchases of insurance contracts and mutual funds for “inadvertent fiduciaries”,
PTE 84-24,


a

SpeciZically, it does not appear thae it would be administra-
eively feasible to propese class relief in the absence -F4
information indicating the extent te which any discretionary
accounts are managed in a uniform manner and therefore are
susceptible eo clase treatment. Similarly, information regardé-
ing the nature and degree of an PCH'’s fiduciary authority

with regard to plan accounts may affect a determination of
whether it woulé be in the interest of plans and plan partici-
pants and beneficiaries ts exempt transactions accomplished

by fiduciary PCMs fer such accounts. In addition, the Depart-
ment is unable te determine whether the conditions suggested

in the application would provide adequate protection for plan
participants and beneficiaries. Por example, condition (e)

in the suggested class exemption included in the application
would require ceporting o€ ceetain transactions and costs

at three menth intervals by the FCM to an independent Blan
giduelary. Given the volatile nature of futures markets,

the Department cannet at this time ascertain whether the sug-
gested provision would provide the independent fiduciary with
any real Basie fer everseeing and judging the FCH’s pes formance,
thereby cuardine seainst abuses by the PCM, Substantial eddi-
sional information regarding the need for elase relief and the
nature of the transactions subject to such relief will be
necessary before the Department is able te address the substance
ef your application with regard to FCMs who are alsa fiduciaries
with gespece te plans. As @ result, the Department has tenta-
eively decided not to propese this portion ef your requested
exemption ae this time. ERISA Procedure 75-1, 40 PR 18472
{Apeil 28, 1878}, prevides that an applicant is entitled ts

a senfecence in Washington, 5.C., in the event the Bepertment
eontemplates not proposing the sequested exempeion., If you
Sesize a conference, please contact William J. Flanagan, Office
ef the Selicicer, 0.S. Bepartment of Labor, (202)523-95S2,

er notify the BDeparement in writing at the following address:
G£fice of Regulations and Interpretations, Office of Fension
and Welfare Benefit Programs, Room C-4526, 200 Constitution
Ave., 4.¥., Washington, 3.€., 20210. A request for a conference

should be received within ninety days of the date of this
detear.

Rt the conference, you should be prepared to discuss any matter
which yeu Believe will suppert a decision to publish the requested
exempton in the Pederal Register for comment. Any additional
information of arguments that you want considered with regasé

ee your application should be submitted in writing eo the

aéézess above ne later than five days before the scheduled

date ang time ef the esnference.

In the even @ request for a conference, or additional informa-
eien in suppeet of youre exemption request ig nee received

within ninety days of the date of-this letter, you will be
neevigled that a inal decision has been made not to propese

the requested exemption and that this portion of your application
file hee been clesed.


16

party in interest have had nc prior dealings with regard to

the fugugeg contract. This matching would require the delivery
and acceptance of the commodity between the plan and the party
in interest.

In both the open outery trading and clearing process instances
gescribed above, a plan and a party in in be linked
in a transaction iow: s

in general, it is expected that a transac@-
eien will net be a prohibited transaction
(ander either the labor er tax previgions)
i€ the transaction is an ordinary ‘plind*
purchase or gale of securities through

&a exchange where neither buyer nor seller
(nee the agent of either) knows the identity
ef ehe ether pasty invelved. In this
ease, there is no reason to impese a sanc-
gion on a oi iasy (of pasty-in-interest)
merel: cau. ant the other party
Surns ove to be a party-ine-interese (or
plan).

E.R. Report 93-1280, $34 Cong., 24 Sess. B. 307. e ig the
Bepartment's opinion that the tzansactions described in the
PIA'e PTCE Request ¢5 are “blind" transactions within the
meaning of the legigletive history of the Ace. Therefore,
such transactions are not prohibited under section 406 of
the Aet, and the Department does not believe there is a need
for any additional exemptive celief.

r

£. Consiusion.

fn view o€ this letter, the Department believes that no further
action ig necessary with regard to PTCE requests $3 and €5.

he @ cesule, the Bepartment is closing those portions ef your
exemption request. With regard te PTCE Request #4, the Department
will helé the file open for an additonal ninety days pending
ceceipt of a request fer a conference or the submission of
aééitional information, as Giseussed above.


aw

You indicated that this statement has been the source of confue
sion within the futures industry. You represent that plans

are unsure whether the Department will require a specific
method and frequency for withdrawals, such ag daily wire trang-
fess of excess amounts. in order to aveid such uncertainty,
you have requested exemptive relief for the helding of "excess"
margin amounts in the margin eecount.

Tt was the Department's intention in footnote 1 of Opinion
82-49 to call attention to the fact that plan fiduciaries
muse act prudently with regard to the plan's sights under
ea future contract. Phe information before the Department
indleates that there may be eireumstances consistent with
the requirements of Title I of the Act in which limited amounes
of excess margin may be left in the margin account. For exame
ple, in a particularly volatile market, such excess margin
may provide a cushion for @ customer and thereby allow the
customer t¢ avoid the necessity ef making repeated maintenance
margin payments. It was not, therefore, the Department's
intention to preseribe e specific withdrewsl method applicable
to ezcesg margin amounts. I¢ is the fidueiary’s responsibility
&¢ make reasonable arransements fer such withdrawals in Light
ef all relevant facts and sircumstances. However, the failure
€ a plan fiduelary te make such reasonable arrangements,
oz to exercise withdrawal rights in a timely manner, of any
arrangement, agreement or understanding, whether express or
implied, Between a fiduciary and an FCM te refrain from exerei-
sing such rights may result in prohibited transaction under
section 406 of the Act. 3/ ~

€.  PTCE Request $4.

You have also requested class exemptive relief from the prohibi-
tions of section 406(b) of the Act for transactions similar

te these subject to PTCE Request #3 when the PCM ig alsc a
figuciary with respect te the Blan. PTCE Request §4 is pate
terned after PTE 7S-1 (44 PR §963, January 36, 19783

37 We note that in PTE 76-1 (41 FR 12746, 12741-42, March

26, i876}, the Department granted class exemptive relief fer
situatione in which there were extensions of time for employers
e¢ make contributions te multlemployers plane. The Separtmene
at that ¢ime noted that a prohibited eransaction would occur

if the plan failed te make reasonable efforts te collect she
Gelinquent contributions. The Department nevertheless granted
exemptive relief in consideration of the large size ef multia
employer plans, the complexity ef euch collection efforts,

and the fact that such extensions of time were often necessi-
fated due to. facters beyond the control of the parties involved.
These considerations distinguish PTE 76-1 from the present
Situation since PCMs and plans may negotiate acceptable, ané
often self-executing withdrawal arrangements.


So long as a plan-investor has not terminated its futures contract position by means of an
offsetting transaction or by taking delivery of the underlying commodity, the plan has no right to
any assets in the margin account except for those which are available for withdrawal by reason
of favorable price fluctuation credits to the plan.

In view of the above, it is the opinion of the Department that the assets held by the FCM to fund

a plan's margin account (consisting of initial and maintenance margin in connection with a future
transaction) are not plan assets for the purposes of Part 4 of Subtitle B of Title I of the Act. When
a plan engages in a futures transaction, its assets are the rights embodied in the futures contract
as evidenced by a written confirmation and outlined in its agreement with its FCM, including such
rights as the plan may have to make withdrawals from the account. +

2. Trust Requirement. Section 403(a) of the Act provides that all plan assets must be held in
trust. You have asked the Department's opinion as to the extent to which this trust requirement
applies to the holding of margin. As noted above, it is the Department's opinion that the relevant
plan asset is the plan's right to payment from the margin account under certain circumstances as
embodied in the futures contract and the agreement with the FCM rather than the assets used by
the FCM to fund the account. Therefore, the trust requirement in section 403(a) generally would
be satisfied, with respect to the holding of margin in connection with a futures transaction
involving a plan, if the FCM maintains the account, including any agreements, confirmations,
etc., relating to the account, in the name of the plan's trustees, as trustees of the plan. See 29
CFR §2550.403a-1 (47 FR 21241, 21247, May 18, 1982).

3. Investment Advice. Section 3(21)(A)(ii) of the Act states that a person is a fiduciary with
respect to a plan to the extent that “he renders investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or other property of such plan, or
has any authority or responsibility to do so.” Regulation 29 CFR 172510.3-21(c) states the
circumstances under which a person will be deemed to be rendering investment advice for the
purposes of section 3(21)(A)(ii) of the Act. You have requested our opinion as to extent to which
this regulation applies to an FCM.

Paragraph 2510.3-21(c)(1)(i) of the regulation indicates that the standards contained in the
regulation apply to an individual who “renders advice to the plan as to the value of securities or
other property, or makes recommendations as to the advisability of investing in, purchasing, or
selling securities or other property.” Paragraph 2510.3-21(c)(1)(ii) of the regulation outlines the
degree of control, authority or influence such a person must possess to be deemed to be
rendering investment advice.

Because futures contracts (as well as the underlying commodities) are “property”, and because,
according to your representations, part of an FCM's function may be to recommend investment
action with regard to such property, a determination of whether an FCM is rendering investment
advice within the meaning of section 3(21)(A)(ii) of the Act will be made in accordance with the
standards set forth in regulation 29 CFR §2510.3-21(c)(1). Of course, the issue of whether an
FCM's activities rise to the level of those outlined in paragraph 2510.3-21(c)(1) of the regulation
is a factual determination to be made on the basis of the relevant facts and circumstances of
each case.

4, Holding Margin. In addition to questions regarding the status of margin payments as plan
assets to be held in trust, you have asked whether an FCM will be deemed to be a fiduciary
merely because the FCM holds initial or maintenance margin. Specifically, you note that an FCM
holding margin could be considered a custodian, and section 3(14)(A) of the Act includes as a
party in interest “any fiduciary (including, but not limited to, any administrator, officer, trustee,
or custodian) ...”


A. Background.

You have provided the Department with extensive information regarding trading in futures
contracts, which is summarized below.

It appears that a futures contract is basically an executory bilateral agreement pursuant to which
a party agrees to buy or sell a specific quantity of a commodity for a stated price at a set time in
the future. Pursuant to section 6 of the Commodity Exchange Act (CEA) (7 U.S.C. §6), dealings
in futures contracts may lawfully occur only in a “contract market” designated by the Commodity
Futures Trading Commission (CFTC) and governed by the CFTC's regulations. You represent that
a contract market is the equivalent of a national security exchange. A person buying a
commodity futures contract is said to be taking the “long” position and is obligated to take
delivery of a specific amount of the underlying commodity at the date indicated in the contract. A
person selling a commodity futures contract is said to be taking a “short” position and is
obligated to deliver a specific quantity of a given commodity on the date indicated in the
contract. Trading in futures contracts does not necessarily involve the purchase or sale of the
underlying commodity. Rather, futures contract trading concerns the buying and selling of the
rights and obligations attendant upon making or taking delivery of a commodity at some date in
the future. Since each futures contract represents such executory agreements to buy and sell,
the number of short and long positions is equal at all times.

Futures contracts are bought and sold by open, competitive outcry on the floor of a contract
market. A person wishing to trade in futures contracts will place an order with a futures
commission merchant (FCM). The FCM will act as an agent for the customer and transmit the
customer's order to a broker on the floor. A floor broker with a long order will shout the amount
and price of his order, and a floor broker with a short order will do the same. Where the
quantities and prices agree, a trade is executed. The respective iong and short orders are
recorded and transmitted to the clearing organization for the contract market. This clearing
process severs the link between the two floor brokers, as long positions are matched with short
positions of corresponding amount, price and maturity date without regard to the identities of
the original traders. This is made possible because futures contracts in each commodity are in
standard form and therefore fungibie, varying only in amount, price and maturity date. The
clearing firms for the buying and selling floor brokers accept the contracts and assume the
responsibility for performance. When the contracts are submitted by the clearing firms to the
clearing organization and accepted by the latter, the clearing firms are relieved of liability to one
another. As a result of the clearance process, the parties involved in the transaction need only be
concerned with the parties with whom they are in direct contractual relation. Thus, the buyer and
seller look to their respective FCMs, the FCM looks to his client and to the clearing organization,
and the clearing organization looks to both FCMs.

When a customer engages in a futures transaction through an FCM, the customer is required to
pay to the FCM an amount equal to a small percentage of the contract amount. This payment is
called initial margin, and the minimum amount of such margin is set by rules established by each
contract market based on the volatility of the commodity underlying the futures contract. You
state that, typically, the minimum margin is 3 to 10 percent of the contract amount. The FCM
may require a higher amount of initial margin based on the creditworthiness of each customer,
or other relevant characteristics. You represent that the nature of margin in futures transactions
is different from that of margin in securities transactions in that futures contract margin does not
involve the borrowing of funds by a customer to finance the transaction. Rather, you state that
initial margin is in the nature of a performance bond or a good faith deposit on the contract
made by the parties. Subsequent payments, called maintenance margin, to or from the FCM may
be required as the price of the underlying commodity fluctuates, making the long and short
positions in the futures contract more or less valuable. Thus, where a trader has taken a long
position (that is, made a contract to buy a specified amount of a certain commodity at a future
date for a set price) and the price of the underlying commodity has risen, that position will have


ERISA Opinion Letter 82-49A , 09/02/1982
References: 401,
References: 401(b),
References: 403,
References: 403(a),
References: 3,
References: 3(21),
References: 3(21)(a),
References: 3(14),
References: 3(14)(b),
References: 3(38)
Howard Pianko, Esq.
Baer Marks & Upham
299 Park Avenue

New York, N.Y, 10171
Dear Mr. Pianko:

This is in reply to your request on behalf of the Futures Industry Association, Inc. (FIA) for a
number of advisory opinions and class exemptions under the Employee Retirement Income
Security Act of 1974 (the Act) relating to employee benefit plan investments in futures contracts.
You filed an initial application with the Department for an advisory opinion on October 17, 1980.
By letter dated February 17, 1981, the Department informally notified you of its tentative
assessment of the issues raised in your application. At the same time, the Department indicated
that it would take no final action with regard to your application until you had submitted certain
additional materials. You submitted these materials (which included requests for additional
advisory opinions and for class exemptive relief) on May 12, 1981 and June 5, 1981. Further
information was provided by you at a meeting with representatives of the Department on
October 6, 1981. Pursuant to that meeting, you filed on November 10, 1981, a finalized
application for advisory opinions and class exemptive relief.

As discussed at the October 6th meeting, the purpose of this letter is to reply to your advisory
opinion requests. Your requests for class exemptive relief will be addressed separately.


om

which provides relief for agency transactions by securities
brokeredealess whe are fiduciaries with respect to theiz plan
elients. 4/ The FIA application indicates that, in the absence
of transaction-by-transaction approval By an independent fiduei-
ary, the performance of these services By 2 fiduciary PCM

for additional consideration would involve transactions pree
hibited by section 406(b) of the Act which are beyond the

scope of the celief previded in section 468(b) (2) of the Ace.
The application contains a propesed exemption ineluding a
vatiety of authorization and disclosure provisions which,

you maintain, provide sufficient safeguards te plan customers.

Section 406(8) cf the Aet prohibits a plan fiduciary from
engaging in acts involving self-dealing er confliets of intere
est. Seetion 406(b) (1) provides that a fiduelary with respect
te a plan shall act deal with the assets of the plan in his
own interest of fog his own account. Section 406{b) (2) pro=
hibies a fiduciary from acting on behalf ef a party (er repre-
senting @ party) whose interests are adverse te those of the
plan and its participants and beneficiaries in a transaction
involving the glan. Pursuant to seetion 406{b) (3), a gidveiary
may not receive any consideration for his own personal acesune
from any party dealing with the plan in connection with a
eransaction iavelving the assets of the plan.

With respect te the prohibitions in seetion 406(5), regulasion
23 CPR €2550.408b-2(a) indicates chat seetien 408(b)(2} of
BRISA doses not contain an exemption fer an ace deseribed in
section 46€{b) of ERISA even if such act oceurs in eonnec=

ties with a provision of services which is exempt under section
408(b) (2). Ags explained in regulation 29 GFR §2850.é08b<Zle) {1},
if a fiduciary uses the authority, centrel, er respensibilley
which makes i¢ a fiduciary te cause the plan to enter inte

@ ¢zansaction invelving the prevision of services when such
fiduciary has an interest in the transaction which may affect
the exercise sf its best judgment as a fiduciary, a transaction
described in section 466(5) would eceur, and that transaction
would be deemed te be a separate transaction from the trans-
action invelving the provision ef services and would act be
exempted By section 408(5}(2). Conversely, the zeculation
explains thee e fiduciary does net engage in an act described
in section 496(&) if the €iduelary dees net use any of the
authority, control er cesponsibility which makes such person

vi Similar relleg is provided for life ingurance company
Pooled separate accounts by PTE 84-46 (28 PR 22187, Hay 25,
L964). The Department has sreposed variscus amendments eo
peek STE 7S-1l and STE 84-46. See 50 PR 3427 (January 24,
1885).


(7) whether an FCM will be a fiduciary if, pursuant to applicable law and the
customer agreement, such FCM liquidates futures contracts in the plan's account
and sells government securities or other securities posted as margin to satisfy
losses suffered by the account; and

(8) whether an FCM registered both under the Commodity Exchange Act and
under the Investment Advisers Act of 1940 will be an investment manager within
the meaning of section 3(38) of the Act when such FCM renders advice solely with
regard to futures contracts.

Except as necessitated in response to these eight requests, the Department is offering no opinion
with regard to the status of specific futures transactions under Part 4, Title I of the Act.
Specifically, we note that Section 404(a)(1)(B) of the Act requires that a fiduciary discharge his
or her duties with respect to a plan with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character and with like aims.
Accordingly, the fiduciaries of a plan must act “prudently” when deciding whether to engage in
futures contract trading as part of a plan's overall investment strategy. Similarly, the general
standards of fiduciary conduct would apply to futures transactions effected by an FCM who,
under the circumstances, is a fiduciary with respect to a plan. Further, nothing in this letter
changes the fact that certain futures transactions between a plan and an FCM who Is a party in
interest (including a fiduciary) will be subject to the prohibitions of section 406 of the Act.

1. Margin and Plan Assets. You have represented that both initial and maintenance margin are in
the nature of performance bonds or good faith deposits and indicate a customer's commitment to
abide by his agreement with an FCM regarding his futures account. You state that, because of
this, margin payments should not be classified as plan assets.

When an authorized FCM effects a futures transaction on behalf of any investor, including an
employee benefit plan, the investor's rights and obligations with respect to any property held at
any time in a margin account are fixed and determined in accordance with the provisions of the
CEA, the rules and regulations of the CFTC and the rules of the applicable contract markets
which are generally incorporated in the investor's agreement with its FCM. Both the buyer and
seller of a futures contract, their respective FCMs, and those clearing firms and clearing
organizations necessary for the proper execution and clearance of a futures transaction assume
obligations with respect to the other parties involved in the transaction which are designed to
preserve the integrity of the trading process.

In this regard, it appears that margin fulfills a function central to the futures marketplace. Under
section 6d(2) of the CEA, an FCM is required to “treat and deal with all money, securities and
property received by such [FCM] to margin ... the trades or contracts of any customer ... as
belonging to such customer ... That in accordance with such terms and conditions as the
Commission may prescribe by rule, regulation, or order, such money, securities, and property of
the customers of such [FCM] may be commingled ... with any other money, securities and
property received by such [FCM] and required by the Commission to be separately accounted for
and treated and dealt with as belonging to the customers of such [FCM] ...” Thus, you represent
that all customers’ assets received as margin by the FCM may be held in a single commingled
account segregated from the funds of the FCM. It appears that Congress recognized that margin
in connection with a futures transaction does not exist solely for the benefit of a customer, but is
essential for the protection of all the investors and all the parties (FCMs, clearing firms and
clearing organizations) that participate in such regulated transactions.


Futures Industry Association

February 3, 2011

The Office of Regulations and Interpretations
Employee Benefits Security Administration

Attn: Proposed Definition of Fiduciary Regulation
Room N-5655

U.S. Department of Labor

200 Constitution Avenue, N.W.

Washington, DC 20210

Re: Proposed Definition of Fiduciary Regulation
Ladies and Gentlemen:

The Futures Industry Association ' is pleased to provide comments regarding the
Department of Labor’s (“Department” or “DOL”) proposed regulation under the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”) that will redefine the term
“fiduciary” under section 3(21) of ERISA and section 4975(e) of the Internal Revenue Code of
1986, as amended (the “Code”). We appreciate the opportunity to comment and hope that our
comments are helpful in understanding the particular concerns of the futures industry.

While the FIA supports regulatory efforts to clarify when a service provider is a fiduciary
and when it is not, we are concerned that the proposed rule does not add clarity or certainty to
this question. In fact, it takes a relatively clear regulation and makes it substantially murkier.
Plans use futures to equitize cash in order to more closely track a benchmark, to increase
liquidity, to “stay in the market” during a transition from one asset class to another or one
manager to another, to efficiently gain exposure to an asset class without incurring the
transaction costs of selling one class of assets and reinvesting in another, and for other
administrative and defensive positioning. They are a critical component of every manager’s
strategy and particularly critical to index funds, which are a significant investment of plans and
IRAs. Making futures less available or more expensive will actually harm plans, a consequence
sought by neither the Department nor the industry.

! FIA is a principal spokesman for the commodity futures and options industry. FIA’s regular membership is
comprised of approximately 30 of the largest futures commission merchants (“FCMs”) in the United States.
Among the FIA’s associate members are representatives from virtually all other segments of the futures industry,
both national and international. Reflecting the scope and diversity of its membership, FLA estimates that its
members effect more than 80% of all futures transactions executed on United States contract markets.


effecting or executing of a futures transaction. Those who provide these clearance services act in
a mechanical fashion without regard to the identity of the investors. Accordingly, it is the view of
the Department that neither the clearing organization nor the third party clearing FCM provides
services to the plan, and neither will be deemed to be a party in interest with respect to the plan
solely by reason of providing clearing services for the plan's FCM.

7. Liquidation of Plan Futures Accounts. You have noted that one way to close out a futures
account is for a customer to take an offsetting position. Ordinarily, it appears that it is the
customer itself who initiates such action. However, you represent that, pursuant to relevant
contract market regulations, the FCM may sometimes close out a customer's account without the
customer's prior order. You state that the majority of such instances occur when a customer has
failed to meet a maintenance margin call. You also state that the FCM's ability to close out an
account may also be governed by the terms of the agreement negotiated between the FCM and
the customer. You further represent that any outstanding losses suffered on a terminated futures
contract will be made up out of the margin posted by the customer. When the margin is in the
form of cash, any balance after paying off the losses is returned to the customer. When a
customer has posted government securities or other securities as margin, you indicate that the
FCM will sell an amount of such securities sufficient to offset losses on the account and return
the remainder to the customer.

You have requested an advisory opinion that, when an FCM liquidates the futures contracts in the
account of a plan customer and sells securities posted as margin by the plan to meet losses
experienced by the plan's account, such FCM is not a fiduciary within the meaning of section
3(21)(A)(i) of the Act as long as the FCM is acting in accordance with applicable law and the
agreement negotiated with the plan customer. Section 3(21)(A)(i) of the Act states that a person
will be a plan fiduciary to the extent such person exercises discretionary authority or control over
the assets of the plan. As noted above, a plan's assets in a futures transaction are those rights
embodied in the futures contract and granted pursuant to applicable law and the plan's
agreement with the FCM. However, it appears that such jaws and agreements place certain
obligations on the plan and give the FCM certain rights vis-a-vis the plan customer. Thus, for
example, whereas the FCM is obligated to act as the plan's agent pursuant to the customer
agreement, the plan customer is required, by the agreement and by applicable contract market
rules, to make maintenance margin payments in a timely manner when called upon. Failure to
meet a maintenance margin call will result in the FCM's ciosing out the plan's account and
resorting to the initial margin (which is in the nature of a performance bond, as noted above) to
make up losses suffered by the plan's account. Any remaining initial margin is then returned to
the plan customer. It does not appear that such legally granted or contractual rights necessarily
amount to the type of discretionary authority or control over plan assets contemplated in section
3(21)(A)(i) of the Act. As a result, it is the Department's opinion that an FCM acting in
accordance with applicable law and pursuant to the agreement negotiated with the plan
customer would not be a plan fiduciary within the meaning of section 3(21)(A)(i) solely by
reason of liquidating the futures contracts in a plan's account and selling any securities posted as
margin in order to pay off losses suffered by such account since the FCM would not be exercising
any discretionary authority or contro! with regard to plan assets.

8. Applicability of Section 3(38) of the Act. Section 3(38) of the Act defines the term “investment
manager” to mean any fiduciary of a plan who has the power to manage, acquire or dispose of
any plan assets, and who is either a bank, an insurance company, or investment adviser registed
under the Investments Adviser Act of 1940. You have requested an opinion that an FCM or other
person registered as a commodity trading advisor (CTA) under the CEA who is also a registered
investment adviser under the Investment Advisers Act of 1940 may be an investment manager
within the meaning of section 3(38) of the Act even when such FCM or other person renders
advice soiely with respect to futures contract transactions.


A person's status as a plan fiduciary is determined pursuant to section 3(21)(A) of the Act.
Section 3(21)(A) provides in pertinent part that a person is a fiduciary to the extent he exercises
any discretionary control or authority with respect to the management of the pian, or the
management or disposition of plan assets. Since the assets held by the FCM to fund the initial
and maintenance margin are not plan assets, as noted above, an FCM would not be a plan
fiduciary under section 3(21)(A) solely by reason of holding margin.

5. FCM Acting Pursuant to Instructions of an Independent Fiduciary. You have indicated that, in
many cases, an FCM will execute transactions in the ordinary course of its business for the
purchase or sale of commodity futures contracts on behalf of a plan pursuant to the instructions
of a plan fiduciary who is independent of such FCM. You state that the instructions from such
independent plan fiduciary to the FCM typically specify: (1) the commodity futures contract to be
purchased or sold (including the delivery month stated in such contract); (2) the price range
within which such futures contract is to be purchased or sold; (3) a time span during which such
contract may be bought or sold (but never exceeding one business day); and (4) the minimum
or maximum quantity of such futures contract which may be bought or sold within the indicated
price range. You have requested an advisory opinion that, under such circumstances, an FCM
would not be a fiduciary with respect to a plan within the meaning of section 3(21)(A) of the Act.

You have further indicated that the conditions applicable to an FCM acting pursuant to the
instructions of an independent plan fiduciary are similar, in many ways, to the provisions of
regulation 29 CFR §2510.3-21(d). Regulation 29 CFR §2510.3-21(d) outlines the circumstances
under which a registered broker or dealer, a reporting dealer, or a bank will not be deemed to be
a plan fiduciary when executing a sale or purchase of securities on behalf of a plan pursuant to
the instructions of an independent plan fiduciary. This regulation was designed to dea! with
business practices prevalent in the securities industry, and does not, therefore, apply directly to
the execution of a commodity futures transaction. However, you have argued that the futures
transaction described above is sufficiently similar to the securities transaction described in 29
CFR §2510.3-21(d) to merit the same treatment.

Section 3(21)(A)ni) of the Act states that a person will be a fiduciary with respect to a plan to
the extent such person “exercises any discretionary authority or discretionary control respecting
management of such plan or exercises any authority or control respecting management or
disposition of its assets.” Under the conditions described in your submission and discussed
above, it would appear that the FCM acts as an agent for the independent plan fiduciary. It is the
independent plan fiduciary who determines the fundamental constraints, noted above, within
which an investment of plan assets is made in a particular commodity futures contract. Under
such conditions, therefore, it does not appear that the FCM would possess the authority, control
or responsibility which would make him a fiduciary within the meaning of section 3(21)(A)(i) of
the Act. #

6. Clearing Organizations. As noted earlier, you indicate that once a futures contract is
established, the respective long and short positions are cleared through a clearing organization.
This clearing process severs the relationship between the original traders and matches buy and
sell orders without regard to the identity of the underlying customer. Where an FCM is not a
member of a clearing organization, he must engage another FCM who is a clearing member to
clear contracts through the clearing organization.

You have asked whether, by providing this clearing service, the clearing organization or the
third-party clearing FCM will be a party in interest with respect to a plan by reason of section
3(14)(B) of the Act. Section 3(14)(B) states that a party in interest with respect to a plan
includes “a person providing services to such plan.” It appears that the services provided by the
clearing organization or the third party clearing FCM are an integral part of the mechanics of the
trading process common to all contract markets. A plan investor would expect its FCM, pursuant
to its contractual agreement, to procure all clearance and other services incidental to the


increased in value and the customer will receive from the FCM a maintenance margin payment
(or a credit to the customer's account) reflecting that increase in value. Where a trader has
taken the corresponding short position (that is, agreed to sell a specific quantity of a certain
commodity at a future date for a set price) in the same commodity, his position would be less
valuable since he would be obligated to sell his commodity for less than the current market price.
As a result, the short trader would be required to make a maintenance margin payment to the
FCM,

You note that in a large measure, FCMs are conduits for original and maintenance margin from
customers since they in turn must make original and maintenance margin payments either to a
clearing organization (if they are a clearing member) or to another FCM which is a clearing
member (if they are not). Just as an FCM holds initial margin from customers to insure
performance of the customers’ obligations, the clearing organization holds original margin from
clearing members to insure performance of their obligations.

It appears that there are two ways in which a futures contract position may be terminated. A
customer may elect to make or take delivery of the underlying commodity according to the terms
of the futures contract. Normally, however, the customer, through an FCM, will take an offsetting
futures contract position. In other words, if the customer had previously gone long for a specified
quantity of a certain commodity for a future maturity date, he would close out that position by
going short for an equal amount of the same commodity on the same future date. Any variation
in price between the long and short positions will already have been reflected in the customer's
margin account through maintenance margin payments.

You indicate that, since 1979, plans have increasingly engaged in futures contract trading,
especially with regard to financial futures (Treasury bonds and notes, GNMA certificates,
commercial paper, etc.) Such plans have primarily utilized futures contract trading as a hedging
tool in order to minimize risks associated with fluctuating interest rates.

B. Advisory Opinion Requests.

You represent that, as a result of increasing plan investment in this area, a number of questions
have arisen with regard to the application of the Act to futures contract trading. You have
requested the Department's opinion with regard to eight such issues:

(1) whether initial and maintenance margin are plan assets for the purposes of
Part 4 of Subtitle B of Title I of the Act;

(2) whether initial and maintenance margin must be held in trust in accordance
with section 403(a) of the Act;

(3) whether regulation 29 CFR §2510.3-21(c)(1) will apply in determining
whether an FCM has rendered investment advice to a plan;

(4) whether the holding of margin by itself causes an FCM to be a fiduciary;

(5) whether an FCM executing futures transactions pursuant to instructions from
an independent pian fiduciary and under conditions similar to those contained in
regulation 29 CFR §2510.3-21(d) will be deemed to be a fiduciary;

(6) whether a clearing organization, or an FCM clearing a transaction for another
FCM, will be a party in interest with respect to a plan engaged in a futures
transaction;


BD. PTCE Reouest #5.

The FIA's final exemption request is for relief from the restrice
tions of section 406 of the Ret for all futures contrace teangs~-
actions between a plan and a party in interese, dneluding

anv ROM, if such transactions Fesult from: (1). trading by open
outery cn the floor ef a contract market when the floor brokers
invelved do-not know that-their respective Principals are

a plan ené a party in interest with respect co such plan;

anc (2) allocations by a Clearing erganization o£ notices

of intent to deliver pursuant to e futures contrace, As noted
in more detail in the application and in Opinion 82-488, fueures
sontzacts are bought and sold by epen, competitive sutery

on the fleer of a contract Market. In the ordinary situation,
the floor broker in the trading pit knows only to place a
particular order; the broker does not knew the identity of

the customer for whom he is Placing the order, ner the ideneiey
of the customer on the oppesite side ef the transaction.

This jeint lack of knowledge creates the Possibility chae
trades will cceur between a plan and a Barty in intezese wich
feepect to the plan, including the plan's POM. The Commodities
Putuses Trading Commission and the individual contrace markets
Segulate situations in which the Same FCM is on both sides

of @ transaction. $/

Once a trade is made, both orders are recerded and transmitted
te a clearing organization for the contract market. The eleare
ing process Severs the Link between the floor traders, ang
Ratchegs long and short orders of corresponding amount, price
and maturity date without regard to the identities of the
original traders. This is possible because futures sontracts
in each commodity are in standard form and therefore fungible,
varying only in amount, price and Batucity date. The sleazing
firms accept the contracts and assume the fesponsibiliey fee
performance. They in turn Subeit the contracts to the eentral
elearing organization and, upon acceptance by the latter,

she clearing firms are relieved of liability te one encther.
The clearing organization allocates short coneractes fobligating
the customer te deliver the commodity) among open long sontreets
(ebligating the customer to accept delivery) at the date 9¢
maturity. Because ali contracts are in standard form, there
appears to be nothing to Regotiate at this stage. It is possic
ble that the clearing organization may match a plan with a
party in interest at this point even though the plan and the

ef See, @.8., 17 CFR $1.38 (secorékeeping zequirements of

@il transactions favelving the PCM): 17 CFE §1.52{a)(2} (require
ing each commodity market to establish a program ef surveilance
ef trading floor practices); 17 CFR §153.3(8) (2) lpeehibicion
againse PCH teking the opposite. side of -a-transaction from

his customer without the customer's consent and subjeet eo
sontract market's eules approved by the CPTC},


recommendation by a listener and a plan may consider a great deal of information without
relying on any of it. If the parties do not have a mutual understanding that the recommendation
will be relied on to a significant extent, FCMs would likely conclude that they should not
execute trades for plans and take the risk that the plan had an understanding that the FCMs did
not have.

We will not repeat here all the concerns that this unintentional fiduciary status raises,
other than to say that uncertainty with respect to one’s role cannot benefit the markets, plans, or
the Department’s enforcement program. The Department has pointed to no abuse with respect to
futures trading, nor has it analyzed the very significant costs that plans would bear if they were
unable to employ futures as a trading strategy.

We have studied the selling exception in hopes that it would mitigate some of the
concerns described above. We do not think that it does; moreover, we do not believe that it is
broad enough to cover FCMs. The selling exception appears to provide relief for dealers and
their agents. FCMs are neither dealers nor dealer’s agents. FCMs are the plan’s agent. The two
required warnings for use of the exception ~ that the party is adverse and is not offering impartial
advice — are inapposite for our role. If the Department moves ahead with this regulation, we
urge you to include a safe harbor for FCM similar to that provided in 29 CFR 2510.3-21(d) for
securities brokers. We suggest the following language to track the current safe harbor for
securities dealers.

Execution of futures transactions. (1) A person who is a futures commission merchant
registered under the Commodity Exchange Act or similar foreign regulatory regime shall not be
deemed to be a fiduciary, within the meaning of section 3(21)(A) of the Act, with respect to an
employee benefit plan or other plan subject to section 4975 of the Internal Revenue Code of
1986, as amended (“plan”) solely because such person executes transactions for the purchase or
sale of futures contracts, foreign exchange contracts or options on either on behalf of such plan
in the ordinary course of its business as a futures commission merchant, pursuant to instructions
of a fiduciary with respect to such plan, ift

(i) Neither the fiduciary nor any affiliate of such fiduciary is such futures commission
merchant; and

(ii) The instructions specify (A) the futures contract or option to be purchased or sold, (B)
a price range within which such futures contract is to be purchased or sold, (C) a time span
during which such futures contract may be purchased or sold (not to exceed five business days),
and (D) the minimum or maximum quantity of such futures contract which may be purchased or
sold within such price range.

We also urge the Department not to permit any regulation to be effective until the
Department grants an exemption for futures trading similar to PTE 86-128. The industry has
sought such an exemption for more than 20 years. We look forward to working with the
Department to answer any questions you may have so that an exemption may be granted.


PTCE Resuest 33.

The FIA's PTCE Request $3, as amended in its supplementary
Submission, requests relief in two areas. First, the apslig
Gation sequests general @zemptive relief for the prevision

ef a variety of nonefiduciazy services by a futures commission
merchant (PCM) ts a plan in relation te futures transactions,
Second, the PIA requests Specific relief for the holding by

an FCM of so-called “excess margin® in a plan's margin account.
These two parte of PCE Request €3 are discussed separately
below.

i. Non-Fiduciary Services. The PIA hag zequested relief

from the prohibitions of seetian 406(a) of the Act and section
4375 (2) (1) (A) throvgh (BD) of the internal Revenue Code of

1854 (the Cede) fer transactions involved in the effecting

@nd executing of futures contract Srangactions on behalf of

@ plan by an PCM whe is a party in interest (other than a
fiduciary} with respect to a plan. The PIA has requested
similar relief for the rendering of any advice te a plan by

an PCM who {s a party in interest with Fespect to such plan
under circumstances where auch advice does net render the

PCH a fiduciary with respect te the Plan. The PIA notes that,
in many ingtances, @ plan fiduciary other than the FCM makes

the decision on a transaction by transaction basis to invest
glen assets in futures contracts. In such Gases, the FCK

S&S as an agent ef the plan figuelasy and performs functions
of a ministerial nature. The PIA indicates shat such ministerial
Services include effecting or executing the futures transaction:
clearing the trade through the clearing process; receipt,
payment and holding of margin; and, if the position ig nee
closed out by an offsetting transaction, making of taking
Gelivery of the underlying commodity. The FIA mainteins that
these and other transactions incidental te effecting and execute
ing futures transactions lavelve no diseretion on the pare

Sf the FCM, :

in support of this exemption request, the FIA maintains chat

the requested relief is similar te that granted to the securities
industry in Prebibited Transaction Zxemption (PTE) 75-1, Part

2 (46 PR SO848, $0846, October 31, 1978}. PTE 75-1, Pare

i provides cellef from the prohibitions of section 406 of

the Act for the effecting and executing ef securities trans-
actions for @ plan by 2 securities broker-dealer whe is a

Berty in interest with respect to the Blan (other than a fiduei-
ary) and who acts as an agent for the plan with regard to

the transaction. Fhe FIA represents that FOMs perform agency
functions similar ¢e these performed by securities broker-
gealers, and that the requested relief is Recessary te allew
plans t¢ make full use ef all available investment opportune
ities. The FIA argues shat, although eelief-may be available


of the Act provided the conditions of section 408(5) (2) and
reguietion 2$ CPR §2550.408b=-2 are met. As a gesult, the
Department does net believe that further ezemptive relieé
for these transactions under section 408(a) ef the Ace is
necessary.

2:.2%Se8s Margin, As explained in Opinion 82-49A, in order
to establish 2 position in a futures market, & eustomer is
required = pay to an PCM an amount of initial margin specie
fied by the contrace market in which the customer is trading.
This initial margin paytent is equal te a small percentage

of the contract amount, and is in the nature ef a performance
bond or goed faith deposit indicating a customer's commitments
t¢ abide by his agreement with an PCH regarding his futures
account. Ags @ result of the function fulfilled by margin
payments in futures markets, adverse market movements will
necessitate additional payments by @ customer inte the margin
account. Similarly, faverable market movements will resul¢
in payments te a customer's account.

Because of such payments, the amoune in a eustomer’s margin
account may et varioug times exceed the amount required eo
maintain the customer's position {nm the futures market. Such
“excess* margin may alse cesult if the sontract market lowers
the initial margin requirement for the futures contract in
which the customer is trading. An additional cause of “excess®
Bargin eseurs when a customer posts government securities

ag Bargin and these securities increase in value. Ordinarily,
She customer's right te withdraw such excess amounts from

the margin sccount is governed by the futures contract as
evidenced by @ written confirmation and outlined in the agree-
ment with the customer's PCH.

The Department addressed the status of guch withdrawal rishts
when 2 plan is the customer in footnete 1 ef Opinion 82-4SA;

With regaré te auch withdrawals, you indi-
cate that the PCM and its eustomer may
choose among several different methods

Sf settling the margin account when mainten=
ance wargin hes acerued te the customer's
benefit. In situations where a plan is
such 2 customer, the Bepartment expresses
Re opinion as te the circumstances, if
any, unéec which the failure by auch plan
So exercise its rights with regard to

she margin account would violate the prac
Sence requizements of section 404(a} ez
-Gonstieute a traneaction. prohibited undeg
section 466 ef the Ace.


¢ advice through an Internet web site which requires the user to indicate whether he or she
has a preference for trading agricultural futures contracts or financial futures contracts.
Users who indicate that their preference is agricultural futures contracts receive different
advice from those who indicate that financial futures contracts are their preference. The
advice is not ‘“based on, or tailored to, the commodity interest or cash market positions or
other circumstances or characteristics of particular clients"; rather the clients are merely
being allowed to select which advisory services they wish to purchase; or

e advice at seminars at which attendees are taught how to trade commodity futures
contracts aided by a software program that is being sold. Before each seminar
commences, the attendees are polled to discover their level of ability and knowledge. A
more advanced seminar is taught for classes that have a higher degree of experience.
Because such advice is not *‘based on, or tailored to, the commodity interest or cash
market positions or other circumstances or characteristics of particular clients, it does not
require registration.”

We believe that this list is instructive, in that it provides additional certainty which
market participants require in order to operate in an orderly and consistent fashion.
In contrast to the role of CTAs, an FCM is the agent of the buyer or seller of a futures contract.
It provides market information to its customers, and executes orders at the direction of a plan
fiduciary. It provides factual information regarding contract markets and liquidity; its client
agreements make clear that it is not agreeing to act as a fiduciary to its clients.

We urge the Department to clarify the proposed rules to make clear that the factual
settings described above will not cause an FCM to be deemed a fiduciary, and to permit the
agreements and mutual understandings of the parties, as reflected in their written agreements,
which are terminable at any time, to govern when and if an FCM is a fiduciary.

For the reasons given by the Securities Industry and Financial Markets Association
(“SIFMA”) in its comment on the proposal, we believe the proposal needs to be reconsidered.
The breadth of the investment adviser test, which does not appear to require an agreement
between the plan and adviser, or reliance on tailored advice, would make many of our members
and their affiliates fiduciaries to plans, solely on account of research reports that are publicly
disseminated. If these entities are fiduciaries, they cannot execute futures trades for the plan. If
they cannot be sure whether they are fiduciaries with respect to a particular plan, they will not
take the risk that the fees they receive will violate the prohibited transaction provisions of ERISA
and the Internal Revenue Code.

Similarly, the Department’s revision of the current test leaves FCMs without the
necessary certainty which would allow them to execute trades for plans. Current law requires
that recommendations be individualized to the plan, be made on a regular basis, pursuant to a
mutual understanding, agreement or arrangement that the advice will be a primary basis on
which the plan makes its decision. The proposal eliminates regular basis, mutual understanding
changes “a primary basis” to “may be considered”. Any factual information may be viewed as a

* See, CFTC Rule 4.14(a)(9).


Our members act as agent for plans and plan asset vehicles that utilize futures contracts in
their portfolios. We do not provide fiduciary advice’; if futures commission merchants (“FCM”)
were deemed to be fiduciaries, we could not execute transactions, because unlike securities
execution, no exemption exists which would permit a fiduciary to earn an additional fee for
execution of transactions.’

The CFTC regulates commodity trading advisors (CTAs) and FCMs. A CTA is an
individual or organization which, for compensation or profit, advises others as to the value of or
the advisability of buying or selling futures contracts, options on futures, or retail off-exchange
foreign exchange contracts. Under CFTC rules, providing advice includes exercising trading
authority over a customer's account as well as giving advice based upon knowledge of or tailored
to the customer's particular commodity interest account, particular commodity interest trading
activity, or other similar types of information.

The CFTC has enumerated the circumstances in which commodity futures advice will not
rise to the quality of advice for which registration is required.* Thus, a person is not required to
register if he or she is providing advice that is not based upon knowledge of or tailored to
customer's particular commodity interest account, particular commodity interest trading activity,
or other similar types of information. Examples of such non-tailored advice include:

e advice to buy or sell specific futures contracts should a particular price level be reached,
through newsletters, books and periodicals wherein the recipients of publications all
receive the same advice; or

e advice (through e-mails, facsimiles, an Internet web site, telephone calls or face-to-face
meetings with customers) that consists of instructions to buy or sell a futures contract
based on a computerized trading system, which also is available for purchase and use on
a personal computer, where the customers all receive the same advice;

¢ advice delivered at seminars at which attendees are taught how to trade commodity
futures contracts aided by a software program that is being sold, along with a question-
and-answer session at which commodity trading advice is provided to the entire group
without asking or receiving information about the personal characteristics of the
attendees;

? Under the commodity futures regulatory regime, a person who provides advice or has discretionary control with
respect to futures strategies and trading is a commodity t trading advisor (“CTA”).
3 PTE 86-128, the successor to PTE 75-1, Part land PTE 79-1, permits a fiduciary to select itself or an affiliate to
execute securities transactions, or transactions ancillary thereto, for an additional fee if its conditions are met. There
is no corollary for futures transactions. A similar class exemption was sought by the futures industry in 1981. The
Department issued an advisory opinion in response to the request, but declined to provide exemptive relief. A copy
of DOL Adv. Opin. 82-49 and the Department’s August 16, 1985 response is attached to this submission. We
assume that the Department’s longstanding positions on futures trading would be unaffected by this change in the
regulation.

* CTAs are required to register unless they have provided advice to 15 or fewer persons during the preceding 12
months and do not generally hold themselves out to the public as a CTA or they are registered in another capacity
(such as an investment adviser) and their advice is solely incidental to that principal business or profession.



The Department has taken the position that, except for banks and insurance companies, only
persons registered under the Investment Advisers Act of 1940 may serve as investment
managers as defined in section 3(38) of the Act. See ERISA Interpretative Bulletin 75-5 (29 CFR
§2509.75-5), questions FR-6 and FR-7. Where an FCM or other person is registered under both
the CEA and the Investment Advisers Act of 1940, such FCM or other person may serve as an
investment manager under section 3(38) of the Act provided the other conditions of that
statutory provision are met.

This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 FR 36281, August
27, 1976). Accordingly, this letter is issued subject to the provisions of the procedure, including
section 10 thereof relating to the effect of advisory opinions. As noted above, having issued this
opinion, the Department will continue consideration of your class exemption requests.

Sincerely,
Jeffrey N. Clayton
Administrator

Pension and Welfare Benefits Programs
A

With regard to such withdrawals, you indicate that the FCM and its customer may choose
among several different methods of settling the margin account when maintenance margin has
accrued to the customer's benefit. In situations where a plan is such a customer, the Department
expresses no opinion as to the circumstances, if any, under which the failure by such plan to
exercise its rights with regard to the margin account would violate the prudence requirements of
section 404(a) or constitute a transaction prohibited under section 406 of the Act.

We note that, even when an FCM is not a plan fiduciary within the meaning of section
3(21)(A)(i), such FCM may still be deemed to be a fiduciary pursuant to section 3(21)(A)(ii) of
the Act and regulation 29 CFR §2510.3-21(c) by virtue of rendering investment advice to the
plan. See Opinion #3, supra. Such FCM may also be a party in interest with respect to a plan as
defined in section 3(14)(B) of the Act.

Further, you should be aware that, when an FCM is deemed to be a fiduciary with respect to a
plan, such FCM is a fiduciary only regarding those pian assets with respect to which such FCM
has the discretionary authority, control or responsibility which cause him to be a fiduciary.

Document Title: ERISA Opinion Letter No. 82-49A
Checkpoint Source: ERISA Opinion Letters

© Copyright 2005 RIA. All rights reserved.


for the provision of non=fiduciary services under section
406(b) (2) ef the Ace, only a elass exemption would provide
a sufficient amount of certainty eo plans seeking to inves¢
in futures.

Onder Reorganization Plan Ne. 4 of 1978 (43 FR 49713, Seeober
17, 1978), effective December 31, 1978, the authority of the
Secretary of the Treasuzy te issue ezemptiong and rulings
under section 4875 of the Code, with certain exceptions nee
here celevant, has been transferred te the Secretary of Labor.
Accordingly, all references to specific sectione ef the Act
Shall also refer te the corresponding sections of the Code.

ta the absence of an exemption, seetion 406(a) ef the Ace
would prohibit the provision of nen-fiduclary services te

a plan by an FCM whe is a party in interest with respect to
that plan. Specifically, such transactions would be viewed

as the prohibited furnishing of services between a plan and

& patty in interest under section 406(2) (1}(C) of the Aes.
However, section 468(b} (2) of the Aes provides a statutory
exemption from the prohibitions ef section 406(a) of the Act
foe contracting or meking reasonable arrangements with a parey
in interese far effice space, or legal, accounting or other
services necessary fer the establishment oz operation of the
plan, i€ ne more than reasonable compensation is paid therefer.

On June 24, 1877, the Bepartment issued segulation 29 CFR
§2556.408b-2 (42 PR 32390) defining the seope of, and certain
terms used in, the statutory ezemption provided by section

468 (5) (3) of the Ace. i/ Specifically, the Department notes
that 29 CPR §2550.408b=2(5) defines the tere “necessary service®
as uged in section 408(5) (2) of the Act as any service that

is “appropriate and helpful te the plan cbtainine the service

in carrying out the purposes fer which the Blan is established
or maintained.” 2/

Upon review of PYCE Request €3, it is the Department's epinion
that the provision of non-fiduciary services deseribed by
the PIA are exempt from the prohibitions of seatien 406 {a}

2/ %& should be noted that requletion 29 CPR $2580. 408b<2

was issued almost two years after publication of PTE 75-1.

Ag such, the guidance provided in the regulation was unavailable
te plans and ¢6 the securities industey in 1978.

2/ Because your application requests class exemptive relief,
you have not presented the Department with s specifie factual
situation to be addressed, However, the Getersination sf
whether a2 transaction invelves @ *necessary service® within
the meaning ef seetion 468{5) (2) and regulation 28 crRr
§2556.468b-2 (b) presents inherently factual questions ag te
which the Bepartment will net ordinarily issue advisery opine
fons. See BRISA Procedure 7é-1, §$.02 {41 PR 36281, 36282,
Auguet 27, 1876),